Market Spotlight: Dollar lifts earnings

Market Spotlight: Dollar lifts earnings

	Published : Tue, 31 Jul 2007 22:25 By : Agencies Print this Story

NEW YORK (AP) - While the weak U.S. dollar has dented Americans' buying power abroad, the greenback's slump has been a blessing for U.S. companies operating overseas.

Companies selling products abroad have brought home earnings in more potent euro, British pounds, Indian rupees -- name your currency -- which are worth more than ever in dollar terms. Investors have taken notice: The past month has seen a shift to mid- and large-cap stocks with more international sales.

'Broadly speaking, we are seeing multinationals are performing better in this reporting season than companies that are purely domiciled in the U.S.,' said Ron Dottin, a quantitative analyst with JPMorgan.

Dottin expects that by year end, dollar weakness will contribute 3 percent to earnings growth among the Standard & Poor's 500 companies

The U.S. dollar slumped to its lowest point ever against the euro earlier this month, when the 13-nation currency fetched more than $1.38. Britain's pound recently bought more than $2.05, its highest level since 1981. The dollar has declined against emerging currencies as well, including the Brazilian real and Chinese yuan.

A currency's strength stems in a large part from the interest rates of the given region or country, which tend to rise during periods of rapid economic expansion and retreat when growth slows. Increasing rates in Europe, China and elsewhere around the world have countered stagnant rates in the U.S., where economic growth has been sluggish.

More than half the S&P 500 companies have reported second-quarter results, so far with an average 8 percent gain in per-share profit -- beating the 5 percent increase expected by S&P analysts, said Alec Young, international equity strategist with S&P. The enfeebled dollar has been one contributor to the better-than-forecast growth, he said.

Among the beneficiaries of the dollar's decline are the energy and technology companies, industrial and materials companies, and makers of consumer products.

The energy and technology sectors led the S&P 500 in foreign sales last year with more than half of revenue coming from abroad, Young said. Foreign sales accounted for more than 40 percent of revenue in the health care, consumer staples and materials and industrials sectors. The data is based on the roughly 50 percent of S&P 500 companies that break out international sales.

Witness the second-quarter results from software and IT services provider IBM Corp. Or Johnson & Johnson, maker of Band-Aids and Neutrogena skin-care products. Or machinery maker Caterpillar Inc. All posted stronger growth overseas and reported substantial lift from favorable foreign currency exchange.

IBM saw its revenue rise 10 percent to $13.1 billion in the second quarter, with 3 percent of that increase due to dollar weakness. Johnson & Johnson, attributed 5 percent of its 13 percent operational growth to favorable currency exchange. Caterpillar, which builds construction equipment and diesel engines, said that strong results outside the U.S. offset weakness in the domestic market.

Ian Cook, president and chief executive of Colgate-Palmolive Co., said in a conference call the company should see a 2 percent to 3 percent pickup from currency exchange, although he suggested that estimate may be 'a tad conservative.' The growth will come primarily from Latin America, Europe and some from Asia, he said.

Over the past month, investors have shown a preference for companies with bigger market capitalizations, said Hugh Johnson, chairman of Johnson Illington Advisors LLC, which manages $700 million in assets. That ordinarily reflects two key trends, he said.

'The dollar has declined and the earnings of large-cap multinationals have been positively affected,' he said. 'That's very true. Secondly, it also could be -- and this is somewhat worrisome -- a signal that we are reaching the end of this cycle, when investors migrate to safer parts of the stock market.'